Brazil, Iran: A Troublesome Relationship for the U.S.
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World economies I get: currency, trading, deficits, surpluses... World politics is another story. I follow what happens: summits, policy changes, elections: but what does it mean for energy markets, potential threats, actual relations between countries? These situations define our future - financial and otherwise.

Today I'm sending you a piece from STRATFOR on the relationship between Iran and Brazil - and what it means for energy, trade, U.S. sanctions, and this rising power in the South. STRATFOR is my go-to source for all things geopolitical. The great thing about it is that it's not just available to government agencies, Fortune 500 corporations and financial advisers such as myself. Rather, you too can access their content. Sign up here for STRATFOR's free weekly intelligence reports. I highly recommend it for investors at any level.

John Mauldin
Editor, Outside the Box


Brazil, Iran: A Troublesome Relationship for the U.S.

Stratfor Today » February 26, 2010

image001
EVARISTO SA/AFP/Getty Images
Iranian President Mahmoud Ahmadinejad (R) and Brazilian President Luiz Inacio Lula da Silva shake hands in Brasilia on Nov. 23, 2009

Summary

U.S. Undersecretary of State William Burns traveled to Brasilia on Feb. 25 in advance of a trip by U.S. Secretary of State Hillary Clinton to Brazil on March 3. The diplomatic preparation work in which Burns is involved centers on Brazilian President Luiz Inacio Lula Da Silva's intensifying long-distance relationship with Iran. For now, the Iranian-Brazilian love affair does not stretch far beyond rhetoric, but Washington sees a growing need to keep Lula's foreign policy adventurism in check, particularly when it comes to Brazil forging nuclear and banking ties with Iran.

Analysis

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U.S. Undersecretary of State William Burns, the State Department's point man on Iran, traveled to Brasilia on Feb. 25 to lay the groundwork for U.S. Secretary of State Hillary Clinton's visit to Brazil on March 3. Usually, such a visit would not require extensive prep work by an undersecretary, but from Washington's point of view, Brazil has moved up in the list of diplomatic priorities. The reason? Iran.

Getting Keen on Iran

Brazilian President Luiz Inacio Lula Da Silva has been getting cozy with Iran as of late. On Feb. 24, da Silva came to Iran's defense, asserting that "peace in the world does not mean isolating someone." He also defended his decision to follow through with a scheduled visit to Iran on May 15 in spite of Iran's continued flouting of international calls to curb uranium-enrichment activity and enter serious negotiations on its nuclear program. He scoffed at the notion that his trip had turned into a scandal and said when he travels to the Persian Gulf, he is "going to negotiate with Iran and sell things to Iran so that Iran can also buy things from Brazil."

The basic question running around Washington in regards to da Silva's behavior is, "What gives?" The United States has long considered da Silva a crucial ally and bridge to the Latin American left. Sharing a common vision with da Silva for business-friendly policies, Washington has relied on the charismatic Brazilian leader to help balance against the more antagonistic, anti-imperialist agenda espoused by leaders like Venezuelan President Hugo Chavez. This is not to say that da Silva was a card-carrying member of the pro-United States camp, but he would take extra care to walk a fine diplomatic line between the United States and its adversaries, like Cuba and Venezuela.

Lately, however, da Silva and his Cabinet appear to be going out of their way to telegraph to the world that Iranian-Brazilian relations are blossoming, putting Brazil within firing range of one of Washington's biggest foreign policy imperatives. Brazilian officials reacted warmly to Iranian President Mahmoud Ahmadinejad's controversial victory in the June 2009 presidential election and were quick to roll out the red carpet for the Iranian president when he paid a state visit to Brazil in November 2009.

Tehran is more than happy to receive such positive attention from Brasilia. Brazil holds a nonpermanent seat on the U.N. Security Council, and U.N. sanctions against Iran require the support of at least 9 of the 15 council members. In addition to having to deal with potential Russian and Chinese vetoes among permanent members, the United States also has to take into account that it will not have the vote of Brazil, which is not satisfied with its temporary seat and is using its foreign policy credentials to seek global support for a permanent seat. Even rhetorical support from an emerging power like Brazil helps Iran in gathering diplomatic fodder to try to prevent a sanctions coalition from amalgamating.

Brasilia's Global Emergence

Da Silva has several strategic motives for publicly playing defense for Iran, most of which have very little to do with Iran itself.

Though Brazil has existed in isolation for much of its post-colonial history with most of its attention occupied by internal political and economic turmoil, the country now finds itself, uniquely, in a stable enough position to start reaching abroad and developing a more assertive foreign policy. Brazil has the political and economic heft to declare itself the regional hegemon, regardless of whether the states in Brazil's immediate abroad are prepared to accept such a reality. In addition to boasting a rapidly modernizing military and a burgeoning energy sector that will place the country among the world's top energy producers within a decade, Brazil has membership in practically every internal grouping that it can find membership in. As da Silva famously said earlier this month, "Brazil is part of the G-20, G-7, G-8, G-3. In short, any G they make they have to call Brazil. We are the most prepared country in the world to find the G-spot."

With an ambitious foreign policy agenda being charted out in Brasilia, da Silva apparently sees some diplomatic benefit in promoting a more contrarian view to the United States. In addition to getting close to Iran, da Silva made a point recently of staunchly defending Chavez's government as a democracy (while referring to his own country as a "hyper-democracy"), and he continues to press the United States to lift its trade embargo against Cuba. By carving out a more controversial position for itself in the international arena, the Brazilian government is looking to gain some credibility in places like Tehran and Caracas to promote itself as a mediator in their thorny dealings with the United States.

Taking Risks at Home

Despite the overabundance of mediators in the Middle East and Brazil's glaring lack of leverage in the region, da Silva remains fixated on the Iran portfolio. This policy does not come without political risks for da Silva. Within Brazil, many are puzzled and uncomfortable with the idea of Brasilia publicly aligning itself with Tehran when even countries like Russia and China (who, unlike Brazil, actually have substantial relations with Iran) are taking care to diplomatically distance themselves every time the regime flouts the West's demands to show some level of cooperation on the enrichment issue.

Indeed, da Silva's decision to politically embrace Ahmadinejad when he came to visit Brazil last year had a polarizing effect on the Brazilian political scene. Da Silva is in the last year of his term and his popularity is still soaring, but his Iran policy could be problematic for his chosen candidate, Brazilian Cabinet Chief Dilma Rousseff, in the run-up to the October presidential election.

When Israeli President Shimon Peres arrived in Brazil to get a pulse on da Silva and his Iran agenda prior to Ahmadinejad's visit in late 2009, Sao Paulo state Governor Jose Serra, Brazil's main opposition leader, took the opportunity to invite Peres to his state, where he made a pro-Israeli speech and later condemned da Silva's reception of Ahmadinejad. Serra is already leading Rousseff in polls by 11 percentage points. Conscious of Brazil's percentage of Jewish population (less than 1 percent of total population) and a sizable number of Brazilians growing leery of da Silva's foreign policy adventurism with Iran, Serra can be expected to hone in on this issue in his campaign. It remains to be seen whether domestic politics in Brazil will lead da Silva to back off his Iran outreach should it prove detrimental to Rousseff's campaign.

The Brazilian business community has not yet reacted strongly to da Silva's diplomatic flirtations with Tehran, but the further da Silva goes in this Iran initiative, the more problems he could create for Brazilian traders who are heavily integrated with the West. Along this vein, it will be important to watch for signs that the United States will seek to retaliate where it hurts Brazil most: In its pocketbook. There already has been talk of restricting access to U.S. financing in the oil and natural gas sector in Washington; and at a time when Brazil has high hopes for the sector, alienating the United States and its high-technology firms could develop into a serious roadblock.

Not Ready to Throw Caution to the Wind?

So far, Washington and others can find comfort in the fact that Brazil and Iran currently do not have much to boast of beyond the diplomatic fanfare. Although Brazil is Iran's largest trading partner in Latin America, the total annual trade between the two remains small at roughly $1.3 billion (with Brazil making up most of this trade through meat and sugar exports). And since Brazil is already self-sufficient in oil, the country simply does not have a big appetite for Iranian energy exports to support a major boost in this trade relationship.

Although Da Silva may see the strategic benefit for now in promoting himself as an advocate of the Iranian regime, he also seems to be conscious of when to take a step back. Much to Washington's discontent, Brazil made a foray into the Iranian energy market in 2003 when state-owned Petrobras obtained exploration and drilling rights in the Caspian Sea under a $34 million agreement. Petrobras, however, said in November 2009 that it was pursuing an end to its activities in Iran, claiming that their technical evaluation concluded that the project was no longer commercially viable. Though Petrobras insisted the decision to leave was not made under political pressure, the announcement came as the United States was gearing up sanctions against Iran's energy sector, perhaps shedding a ray of light on Brazil's pragmatism in handling the Iranian portfolio.

Da Silva's Cabinet also has shown similar restraint in dealing with Iran's nuclear controversy. Brazil has a modest nuclear power program — complete with two nuclear power plants in operation and one under construction, enrichment facilities and a small reprocessing plant. Iran has tried to claim in the past that Brazil has offered to enrich uranium on Iran's behalf (similar to how it exaggerates Japan's willingness to ensnare itself in Iran's nuclear program); however, Brazilian Foreign Minister Celso Morim and local technicians have denied that they would do so, claiming that Brazil does not have sufficient technology to take part in such a deal.

But Washington is not taking chances on Brazil's newfound interest in Iran — hence the U.S. diplomatic entourage that is now making its way to Brasilia. In a tone reminiscent of a parent lecturing a teenager coming of age, U.S. State Department spokesperson Philip Crowley said Feb. 25, "Clearly Brazil is an emerging power with growing influence in the region and around the world, and we believe that with that influence comes responsibility."

How Far Will Da Silva Go?

While most of the Iran-Brazil relationship consists of diplomatic theater, there are two areas of potential cooperation that could be game changers for the United States: banking and nuclear energy. Iran is facing escalating sanctions pressure over its nuclear program. One of the many ways Iran has tried to circumvent this threat is by setting up money-laundering operations abroad to keep Iranian assets safe and trade flowing. In Venezuela, where Chavez will more readily take on an opportunity to stick it to Washington, and in Panama, where banking transparency is an ongoing concern, Iran has forged ties between local banks and Banco Internacional de Desarrollo CA, a subsidiary of Export Development Bank of Iran (EDBI), to give Iran indirect access to the U.S. financial system. EDBI already has been blacklisted by the U.S. Treasury Department for directly supporting Iran's nuclear weapons program and the Islamic Revolutionary Guard Corps. The blacklist affords the United States both the ability for sanctions on Americans dealing with these banks and a pressure lever against foreign firms interested in keeping their U.S. assets safe.

Iran has tried a similar banking tactic in Brazil. When Ahmadinejad paid a visit to Brazil in May 2009, Iranian EDBI and Brazilian banking officials drafted a memorandum of understanding that was on the surface a mere agreement to facilitate trade between the two countries. But facilitating banking cooperation could mean a lot of things, including the establishment of Iranian banks in Brazil to evade the U.S. sanctions dragnet. Brazil already is believed to direct most of its trade with Iran through the United Arab Emirates to avoid attracting negative attention, but Iranian banks on Brazilian soil would not be easy to hide and would not be ignored by the United States.

Then there is the ever-controversial nuclear issue. Reports also emerged in the Brazilian press Feb. 26 that Brazil's Office of Institutional Security, which answers to the president, has begun consultations with technicians in Brazil's nuclear program to establish what points can be included in a possible nuclear deal with Iran that could be signed during da Silva's visit to Iran in May. The O Globo report does not specify what points of cooperation are being discussed, but Brazil reportedly is working on a new uranium-refining technique called magnetic levitation, which is being developed by the navy at the Aramar lab in Sao Paulo. The news follows a Brazilian announcement from early 2009 that the country is pursuing uranium enrichment on an industrial scale, with a goal to produce 12 tons of enriched uranium for nuclear power supply.

Brazil not only is working toward self-sufficiency in nuclear power but also may be positioning itself to become a supplier of nuclear fuel for the global market. Such a move could boost Brazil's mediation credentials in dealing with countries like Iran, but would draw ire from the United States and Israel, which do not want to see Iran acquiring additional nuclear fuel unless Tehran first makes concrete guarantees on curbing the Iranian enrichment program. Adding to these nuclear tensions is Brazil's continued refusal to sign an additional International Atomic Energy Agency protocol for strengthened safeguards in the lead-up to a Nuclear Nonproliferation Treaty review conference scheduled for May. Brazil maintains that it has enough legal mechanisms to prove the peaceful nature of its program, which Iran will echo in defense of its own nuclear activities.

Da Silva has yet to finalize who all will be accompanying him to Tehran this May as the first Brazilian president to visit the Islamic republic. With da Silva pushing the envelope, STRATFOR will be watching closely to see whether discussions among Iran and Brazilian banking and nuclear officials could transform a relationship resting mostly on paper and rhetoric into a real threat to U.S. interests.

JMbuttonTD


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Posted 03-04-2010 8:43 AM by John Mauldin